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The Supreme Court finally speaks on Aggregation

In a hotly-anticipated judgment, the Supreme Court yesterday (22 March 2017) clarified that the scope for aggregation of claims arising from similar acts or omissions in a series of related matters or transactions is confined to circumstances in which there is a real connection between the transactions in which they occurred.

This is undoubtedly an important decision for solicitors, insurers of solicitors, and claimants where aggregation issues may arise. Determining whether transactions are related is “an acutely fact sensitive exercise”. The Court has widened the scope for aggregation, eschewing the requirement of co-dependency or intrinsic relationship which had been prescribed by the lower courts, and thus rejecting the provision of new meanings to words such as “transaction” and “related”. Whilst each analysis will be fact-dependent, in general terms the decision is favourable to insurers as, in comparison with the decisions of the lower courts, it broadens the scope for aggregation of claims and accordingly limits their potential liability to indemnify claims which arise in the context of a series of matters or transactions.

Background

Aggregation permits two or more claims to be treated as a single claim where they are linked by a unifying factor of some kind. The choice of language used to express the unifying factor is of critical importance.

The case concerned the wording in the SRA Minimum Terms and Conditions required to be incorporated into all solicitors’ professional indemnity policies, which permits the aggregation of claims arising from similar acts or omissions is a series of related matters or transactions. More specifically, it concerned the meaning of the expression “related matters or transactions”.

Insurers had sought a declaration that claims totalling over £10m brought against its insured firm of solicitors by 214 individuals who had invested in two similar overseas property developments were to be aggregated as one claim and therefore subject to an overall limit of indemnity of £3m. The investors were co-beneficiaries of the trusts behind each development and, on their behalf, it was contended that none of the investors' claims fell to be aggregated with those of any other investor. The secondary case of both parties was that the claims were to be aggregated as two claims by reference to the two developments, resulting in two available pots of indemnity.

At first instance Mr Justice Teare held that the claims of each investor did not fall to be aggregated with one another. This was on the basis that the claims, whilst arising from similar acts or omissions, were not “in a series of related matters or transactions” because they were not conditional or dependent on each other. This interpretation was rejected by the Court of Appeal, whose own interpretation required the matters or transactions to have an intrinsic relationship with each other, not an extrinsic relationship with a third factor.

Supreme Court ruling

The Supreme Court unanimously, in the voice of Lord Toulson alone, allowed Insurers' appeal against that interpretation, dismissing the Court of Appeal's formulation as neither necessary nor satisfactory. The word “intrinsic” and its meaning in this context introduced difficulty. In any event, whilst use of the word “related” implies that there must be some inter-connection between the matters or transactions, or in other words that they must in some way fit together, the Law Society had specifically decided not to circumscribe the phrase “a series of related matters or transactions” by any particular set of criteria.

The key principles that emerge from the Court's ruling are that:

As previous authorities have held, aggregation clauses are not to be approached with a predisposition towards either a broad or a narrow interpretation.

The scope for aggregation of claims arising from similar acts or omissions in a series of related matters or transactions is “confined to circumstances in which there is a real connection between the transactions in which they occurred, rather than merely a similarity in the type of act or omission”.

Determining whether transactions are related is “an acutely fact sensitive exercise” which involves “an exercise of judgment, not a reformulation of the clause to be construed and applied”.

In considering the application of the phrase “a series of related matters or transactions”, it is necessary to begin by identifying the (matters or) transactions. This analysis was not to be conducted in the “narrow” approach which the Court of Appeal had taken (a payment out of escrow account) but looking at the transaction in the whole, looking at the “wider transaction” in which the act in question occurred.

The application of an aggregation clause is to be judged not by looking at the transactions exclusively from the viewpoint of one party or another party, but objectively taking the transactions in the round.

The Court firmly concluded that the claims of each group of investors did arise from acts or omissions in a series of related transactions, thus envisaging aggregation by development, and two claims for insurance purposes. The transactions involved investments in a particular development scheme under a contractual arrangement. The transactions entered into by the investors in each development were connected in significant ways. The connecting factors were that members of each group were investing in a common development, for which the monies advanced by them were intended, in combination, to provide the developers with the necessary capital; and that notwithstanding individual variations, they were all participants in what was in overall terms a standard scheme. The transactions fitted together in that they shared the common underlying objective of the execution of a particular development project, and they also fitted together legally through the trusts under which the investors were co-beneficiaries.

The Court regarded Insurers' case for aggregating the claims across both developments as one claim to be much weaker. In this regard, it was not enough that the developments had a striking similarity. Whilst the development companies were members of the same group, and the legal structure of the development projects was similar, the development projects were “separate and unconnected”. They related to different sites, and the different groups of investors were protected by different deeds of trust over different assets.

The Court had not been addressed fully on the facts and, in the circumstances, it left open the opportunity for any party to argue that it's characterisation of the transactions was somehow defective. Absent such argument, the claims aggregate as two claims by reference to the two developments.

Comment

As indicated above, this is undoubtedly an important decision for solicitors, insurers of solicitors, and claimants where aggregation issues may arise. Determining whether transactions are related is “an acutely fact sensitive exercise”. The Supreme Court has widened the scope for aggregation, eschewing the requirement of co-dependency or intrinsic relationship which had been prescribed by the lower courts, and thus rejecting the provision of new meanings to words such as “transaction” and “related”. Whilst each analysis will be fact-dependent, in general terms, the decision is favourable to insurers as, in comparison with the decisions of the lower courts, it broadens the scope for aggregation of claims and accordingly limits their potential liability to indemnify claims which arise in a series of matters or transactions.